Tuesday 16 January 2018

Hilton Worldwide plans reit spin-off in bid for value

New York's Waldorf Astoria hotel.
New York's Waldorf Astoria hotel.

Hui-Yong Yu

Hilton Worldwide said it will spin off its lodging properties and timeshare business into separate publicly traded companies in a bid to boost shareholder value as the world's largest hotel operator faces increased competition.

About 70 of the company's 146 owned and leased properties -- mainly the US hotels -- will be spun off into a real estate investment trust, chief executive Christopher Nassetta said. Overseas leased hotels will remain with Hilton, he said. Details of both the reit and timeshare spinoffs will be provided in registration statements to be filed with the Securities and Exchange Commission in the second quarter.

Hilton's owned and leased properties are valued at about $13.5bn (€12.4bn) with 10 hotels generating half of that group's pretax earnings, according to David Loeb, an analyst at Robert W. Baird. He estimates the new reit will hold eight of the top 10, the largest of which is the Hilton Hawaiian Village Beach Resort & Spa in Honolulu. Loeb estimates the timeshare company would be valued at about $2.1bn.

The spinoffs would help Hilton increase shareholder value as rival Marriott becomes the top hotel operator worldwide when it acquires Starwood Hotels & Resorts, a deal set for completion midyear. Hilton is following a blueprint laid out by Marriott, which separated its hotel real estate into a new entity in 1993. That company, which became Host Hotels & Resorts, converted to a reit in 1999, and its timeshare business, Marriott Vacations Worldwide, has a stock-market value of $1.76bn.

"By simplifying our business, each segment should benefit from a dedicated management team with the capital and resources available to take advantage of both organic and inorganic growth opportunities," Nassetta said on the call. "It will also allow investors to more effectively allocate capital towards businesses more aligned with their objectives."

Hilton is facing increased competition from traditional rivals and startups such as Airbnb. Besides its namesake properties, Hilton owns brands including Waldorf Astoria and Hampton Inn. The new hotel reit would hold properties with about 35,000 rooms out of the company's more than 740,000 rooms worldwide.

The spinoffs would create entities that analysts estimate would have a combined market value higher than Hilton has now, and relieve the parent of the capital burden associated with maintaining the buildings. Hilton then would trade largely as an operating company, earning fees from managing and franchising hotels. Hilton said it received a private-letter ruling from the Internal Revenue Service allowing it to pursue the spinoffs tax-free.

Hilton shares rose 2.5pc giving it a market value of about $20.4bn.

"We think this makes sense by simplifying the businesses and should result in a higher net-valuation multiple," JPMorgan Chase analysts led by Joseph Greff said in a note to investors.

Besides the Hilton Waikiki resort, the 10 biggest cash generators include owned hotels in New York, San Francisco, New Orleans and Chicago, and leased properties in Tokyo and Osaka, Japan.

Reits are required by law to pay out at least 90pc of taxable earnings to shareholders as dividends and, in exchange, don't have to pay federal income taxes on those earnings. Blackstone, which took Hilton public in December 2013, still owns about 46pc of the McLean, Virginia-based company.

Hilton's timeshare spinoff will include about 50 properties in the US and Europe. Hilton plans to keep the management of its timeshare business, Hilton Grand Vacations, in place, and is searching for internal and external candidates to lead the new hotel reit, Nassetta said on the conference call.

The company plans to complete the spinoffs by the end of the year.

Nassetta was CEO of Host Hotels, the Marriott REIT spinoff, until 2007, when Blackstone hired him to run Hilton following the firm's buyout of the company. (Bloomberg)

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